This study uses cross-national data from 8 Latin American countries over the period 1990-2003 to examine the impact of international remittances on real exchange rate appreciation. Using an instrumental variables approach to control for endogeneity and reverse causality, the authors find that a 1 percent increase in the remittances to GDP ratio would lead to a real effective exchange rate appreciation of between 18 and 24 percent. Since such a large rate of appreciation would lead to a loss in international competitiveness, the authors also investigate policy options for mitigating these effects, such as controlling fiscal policy, limiting the use of sterilization, and shifting to VAT or sales taxes.

Publication Details

Remittances and the Real Exchange Rate
Lopez, Humberto
World Bank
Publish Date
Lopez, Humberto, Remittances and the Real Exchange Rate (World Bank, 2007).